Greetings;
The waiting is the hardest part
Every day you see one more card
You take it on faith, you take it to the heart
The waiting is the hardest part
/TP
CP wasn’t the last rail to report – that honor goes to Berkshire Hathaway’s BNSF supposedly on August 13. And their earnings were not the only good YOY performance from the rail group, but they did ensure the railway group a “winning record” (4-2 thus far) in Q2/21 and they were the only one of the three “deal” stocks to beat expectations while simultaneously dealing with….stuff. From the Tweet:
In their prepared remarks on their Q2 call, CP did not mention KSU at all, and stated later in their Q&A that they still have enormous “self-help” opportunities and that in the absence of M&A will still outperform the industry….more to follow….Now, it was instantly pointed out to me that a great deal of the Q&A was taken up with their (and CN’s) KSU proposal (the “elephant in the room”) but I thought it was interesting to note that they didn’t start with the trumpet call….Not that they weren’t busy:
- In the earnings webcast, CP CEO allowed: his deal was still better for all concerned, save Montreal (“the facts are very compelling” and “we stand ready to re-engage with KCS”) – but that “priority one, we think the best outcome comes through M&A (i.e.; KSU). But in the absence of M&A we are going to make the best (of it) and I think do better than the balance of the industry with a very unique outcome”. In essence, he says what the current CP has in its opportunity box is very exciting. That is great (though I must admit my first thought is that by stepping back from the M.A.D. program, “you don’t know what I will do if forced” routine – see the Q1/21 webcast – he might have reduced the ‘follow-on-effects” fear at the STB. In the Q&A later the opportunities for alliances between like-minded (PSR) US carriers to take truck share was discussed and even promoted
- They filed a proxy statement with KSU asking their shareholders to a) vote against the CN deal (seems a longshot, and KSU fired back rather sharply about the face-price difference) and/or b) in effect wait until the STB decision on the Voting Trust
- DC-types and railroaders had expected that decision “by the end of July”; with that fictitious deadline come and gone, the new thinking is an announcement by Friday (August 6), the recess date, or by Friday the 13th (of August) – still time enough before the August 19th KSU Special Shareholders Vote….the thinking is that few votes have been cast yet pending the STB….they key, of course, is not just the decision, but the wording of the decision on the VT (and this is a very wordy Board!)
- Meanwhile, the STB allowed CP to continue to receive KSU information via the discovery process….a win for CP for sure but one that also may have broader ramifications:
- Given the Executive Order, the STB could have ruled against this for anti-consolidation reasons – they didn’t, good for both C-railways
- Given the deal pending is CN-KSU they could have judged this moot – they didn’t (good for CP, it would seem)
- Given that the deal pending is CN’s, they could have also ruled against this stating that CP’s deal offer was DOA, but they did not, meaning that CP’s docket – under the old rules – is alive
- Analysts and others continue to assign rather too-precise odds on a decision by five (5) folks, even though a lot of clues have been given. One example that’s interesting but also lacking any real merit is the survey by “Seeking Alpha” which noted the growing pessimism on the Street(s) about the VT (my comments are in LARGE CAP):
- “More than half of the respondents in a small survey of investors/analysts done by Seeking Alpha in recent days said that the deal – WE ASSUME THEY MEAN THE VT - was likely to be rejected, while a few saw a 50/50 chance of approval. If the deal (VT) is rejected by the regulator, Kansas City Southern shares may initially trade(THINKS SA) to about $249/share, representing about 7% downside from the current share price, according to the survey. Answers ranged from a low of $210 to a high of $270. All respondents, except one, in the survey, expected that Canadian Pacific would be back for a deal with KSU if the STB rejected the Canadian National deal, with at least one expecting a higher bid than CP's original offer (READ KEITH’S LIPS – NO BIDDING WAR). One respondent said he didn't expect the current Biden administration would approve any North American railroad M&A (IT ISNT UP TO THE CURRENT BIDEN ADMINISTRATION BUT TO THE INDEPENDENT STB AND THIS ISNT PARTISAN)
Meanwhile, CP’s earnings made it four rail wins in a row, and showed that they have not taken their eye off the ball. CP it should be noted, provides perhaps the best stats in the industry – for example, safety (P/I down 345 and train accidents -70%) and ROIC, down slightly but still 16.7%. The adjusted (for acquisition costs among other things) OR improved 170bps to 55.3 (good for a bronze medal, 20bps off the two gold medalists CSX & UNP – the Americans winning gold is as shocking as a Norwegian winning the 400m hurdles). They widened their OR gap with CN (the latter, remember, more IM-dependent, IM is 60% bigger at CN which is “only 50% bigger overall, in terms of volumes – AND, finally, that is not a bad thing despite THAT ANALYSTS’ questions). EPS was up 27% YOY; revenues and volumes up 15% (the latter in carloads, like I like it, - RTMs were up 9%).
The demand picture is bright, into and through 2022, with grain moving a bit to the “?” category and autos booming but still chip dependent. Intermodal was up 9% (revenues up 3X that level), with share wins & gains from OOCL, COSCO, and Maersk. Pricing remains in the “upper end of their range”. CP, unlike their peers, especially in the US, does not seem to have a resource (“no concerns at CP”) or capacity constraints (in fact they have their “PSR” dividend to play with, including 1000ac of development land to perhaps duplicate their success with autos in Vancouver, for example).
- Kudos to Keith for not running from his dance partner – the results were produced by their “seasoned PSR model”, and even in looking at the overall industry, despite the seismic challenges in the pandemic/recovery, “the industry had sine well (AND) if not for PSR, the outcome I believe would have been a whole lot worse”. Are you listening, Washington?
- CP is holding to its C$1.55B Capex program, but Keith noted the ties between investing (in sidings, for example, or technology) and productivity improvements, which can then be marked as “reliability”. PSR isn’t bad – “it’s a work in progress”.
- Operations were solid financially, great in terms of safety (though there is also a comparison tailwind), and mixed a bit in performance metrics. Train lengths and weight improved 17% and 16%, respectively. Fuel efficiency was flat (an industry pattern?). But loco productivity, terminal dwell, and train velocity all deteriorated, slightly (25, 5%, 3% in order); remember they had wildfires, etc the new normal?). On-times were described (but not shown; their good IR level isn’t perfect!) as solid.
- Sigh….Despite saying that they didn’t run the company for OR, an early question was allowed about the OR in H2/21!
Also:
- Peace in the east? Ever busy, the STB accepted CSX’s merger application for the Pan Am Railway at long last
- The Senate cleared the Infrastructure Bill, which includes $110B for roads & bridges – note, the ASCE, which graded the US roads at a “D” level, said that $786B was needed!); also notable was a lighter touch on the scale, to wit, EV adoption lost 98% from its initial proposal($142B to $15B, including $7B for a buildout of charging stations). The press reported $66B for “railways” – but that, folks, is Amtrak and commuter….
- The Dodgers got (T) Turner and Scherzer – OK, not directly rail-related but a happy rail analyst is a productive rail analyst!
Anthony B. Hatch
abh consulting
http://www.abhatchconsulting.com
abh18@mindspring.com
Twitter @ABHatch18